The Hindu Business Line : Market obsession carried too far

As another year draws to a close and the Indian economy and financial markets come to terms with the US mortgage and credit crisis, the question uppermost in most minds is: are we affected and if so how bad will it be?

The last few years have seen an unprecedented boom. Incomes of those with the right knowledge and skills (and, perhaps, important in the Indian context, the right contacts) have gone up phenomenally. But this is far overwhelmed by soaring asset prices – be it property, shares or gold. That translates into a huge wealth multiplier. Never before in history is the maxim, ‘to those who have shall be given’, sounded more true.

Manifold rise in wealth

Was the boom investment or consumption led. It is an interesting question. Years ago, the Nobel prize-winning monetarist economist, Milton Friedman, coined what has come to be known as the ‘permanent income hypothesis’. Its essence is simple: expectations of lifetime, not current, income drive the spending (and saving) patterns of individuals. Friedman could not have anticipated that wealth would far overtake income – the corporate equivalent of the balance sheet being more important than the profit and loss account.

Asset inflation is undoubtedly a powerful ‘feel good factor’ for those lucky to own the right assets. And certainly if wealth has increased severalfold in an extremely short span of time, there is bound to be a measurable increase in spending and accounts for the rapid growth in demand of consumer and leisure goods, as has clearly happened in our country in the last few years.

Investment scenario

But what is the picture on the investment front? Consumer goods capacities must have gone up. Even if domestic production falls short, there is the easy option of importing, particularly given the more than adequate forex reserves. Going by the jump in non-oil imports in recent times, this seems to have been the case, not to speak of the rising markets for international brands of luxury goods to cater to the most affluent for whom money does not matter.

It is in agriculture and the ‘non-tradable’ sectors - infrastructure and social investments - that we must give ourselves a big “F’. The world-renowned agricultural expert, Dr M.S. Swaminathan’s voice, is in wilderness. Global food prices are rising alarmingly. But we are blissfully ignorant of the risks and happy in a policy vacuum.

Government budgets are no problem - a senior bureaucrat responsible for social sectors says ‘money is no problem’. Yet public housing, health care, schools and transportation are among the worst in the world. Urban India is generally a vast slum with pockets of affluence. The output-expenditure ratio continues to deteriorate by the day.

We are not even sensitive to our real issues and needs, so obsessed are we with financial markets and ‘managing’ capital flows.

More Stories on : Economy | Financial Markets | Financial Scan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page